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What Assets Should Stay Out of a Trust?

A trust is a legal arrangement in which a person or entity, known as the "trustee," holds and manages assets on behalf of another person or group of people, known as the "beneficiaries." The trust is created by a person, known as the "settlor" or "grantor," who transfers assets into the trust for the benefit of the beneficiaries. The main purpose of a trust is to provide a structure for the management and protection of assets, as well as to facilitate the distribution of those assets according to the wishes of the settlor. Trusts are commonly used for estate planning, wealth preservation, asset protection, charitable giving, and managing assets for the benefit of minors or individuals who may not be capable of managing their own affairs.

Trusts can be revocable or irrevocable. A revocable trust allows the settlor to retain control over the assets and make changes to the trust terms or even revoke the trust entirely. An irrevocable trust, on the other hand, typically cannot be altered or revoked without the consent of the beneficiaries. Trusts can also be categorized into various types based on their specific purposes and characteristics, such as living trusts, testamentary trusts, charitable trusts, special needs trusts, and spendthrift trusts, among others. Each type of trust serves different objectives and may have specific legal requirements and tax implications.

It's important to note that the laws surrounding trusts can vary depending on the jurisdiction, so it's advisable to consult with a qualified legal professional or estate planning attorney when considering the creation or management of a trust. Here at the Law Office of Bryan Fagan, we offer the services of expert attorneys in the area of trust who are always ready to help clients in the best ways possible.

How to Set Up a Trust

  • Determine Your Objectives: Before establishing a trust, clearly define your objectives and reasons for doing so. Identify what you hope to achieve through the trust, whether it's minimizing taxes, providing for your loved ones, or supporting a charitable cause. Understanding your goals will help shape the type of trust that best suits your needs.

  • Choose the Right Type of Trust: There are various types of trusts available, each serving different purposes. Some common types include revocable living trusts, testamentary trusts, charitable trusts, special needs trusts, and asset protection trusts. Research and consult with a qualified attorney to determine which type of trust aligns with your goals and circumstances.

  • Select a Trustee: The trustee is responsible for managing the trust assets and ensuring the trust's terms are carried out. The trustee can be an individual, a professional trustee such as a trust company, or a combination of both. Consider the trustee's expertise, reliability, and willingness to fulfill their duties. It's crucial to choose someone you trust implicitly to act in the best interests of the beneficiaries.

  • Draft the Trust Agreement: Consult with an experienced estate planning attorney to draft the trust agreement. The trust agreement outlines the terms and conditions of the trust, including the beneficiaries, trustee powers, asset distribution guidelines, and any specific provisions or restrictions. Ensure the trust agreement is clear, comprehensive, and legally sound.

  • Fund the Trust: To make the trust effective, you must transfer ownership of assets into the trust. This process is known as funding the trust. It involves re-titling assets such as real estate, bank accounts, investments, and personal property into the name of the trust. Consult with your attorney and financial advisors to ensure all necessary documentation and legal requirements are fulfilled.

  • Obtain Professional Advice: Throughout the trust setup process, it is crucial to seek guidance from professionals well-versed in trust law and estate planning. Consult with an experienced attorney specializing in trusts, tax advisors, and financial planners. They can provide invaluable advice, ensure compliance with legal regulations, and help optimize your trust structure.

  • Review and Update Regularly: As circumstances change, it is essential to periodically review and update your trust. Life events such as marriage, divorce, births, deaths, changes in financial circumstances, or alterations in your objectives may require modifications to the trust. Regularly reviewing and updating your trust ensures it remains aligned with your intentions.

  • Communicate with Beneficiaries: Although not a legal requirement, open and honest communication with your beneficiaries about the trust's purpose, terms, and expectations can prevent misunderstandings or conflicts in the future. It allows them to understand your intentions and prepares them for their role as beneficiaries.

Types of Trusts

Types of Trust

Functions and Purposes

Revocable Living Trust

Allows the settlor to retain control and make changes during their lifetime. Provides a smooth transfer of assets upon death and avoids probate.

Irrevocable Trust

Provides asset protection, minimizes estate taxes, and ensures wealth preservation. Once established, the terms cannot be changed without beneficiary consent.

Testamentary Trust

Created through a will and becomes effective after the settlor's death. Often used to manage assets for minor or incapacitated beneficiaries.

Charitable Trust

Supports charitable causes and provides tax benefits to the settlor. Can distribute income or assets to charitable organizations while retaining control.

Special Needs Trust

Designed to provide for individuals with special needs without disqualifying them from government benefits. Preserves eligibility for assistance programs.

Spendthrift Trust

Protects beneficiaries' interests by limiting their access to trust assets, shielding the assets from creditors or poor financial management.

Asset Protection Trust

Shields assets from creditors and potential lawsuits, safeguarding wealth for future generations or specific beneficiaries.

Qualified Personal Residence Trust (QPRT)

Transfers a personal residence or vacation home to beneficiaries while reducing estate tax liability.

Life Insurance Trust

Holds life insurance policies outside the estate, allowing the proceeds to pass to beneficiaries free of estate taxes.

Dynasty Trust

Preserves wealth for multiple generations by minimizing estate taxes and providing ongoing asset management and protection.

Grantor Retained Annuity Trust (GRAT)

Transfers assets while minimizing gift taxes, with the grantor retaining an annuity income stream for a specific term.

Qualified Terminable Interest Property Trust (QTIP)

Provides for a surviving spouse while maintaining control over the final distribution of trust assets.

What Type of Assets Should be Excluded from Trusts?

While trusts are a powerful estate planning tool, not all assets should be placed within a trust. It's important to understand which assets are typically best kept outside of a trust. Here are some examples:

1. Retirement Accounts: Assets held in individual retirement accounts (IRAs), 401(k)s, or other qualified retirement plans should generally remain outside of a trust. These accounts already come with their own beneficiary designations, and placing them in a trust can have adverse tax consequences, such as accelerating the distribution of funds or subjecting them to higher tax rates.

2. Health Savings Accounts (HSAs): Similar to retirement accounts, HSAs typically have their own beneficiary designations. Placing them in a trust could lead to the loss of tax advantages or early withdrawal penalties.

3. Tangible Personal Property: Items such as jewelry, artwork, collectibles, and furniture are generally not recommended to be placed in a trust, especially if they have sentimental value or require ongoing use by the settlor. Instead, it may be more appropriate to specify their distribution through a separate personal property memorandum or a will.

4. Motor Vehicles: Vehicles, such as cars, motorcycles, or boats, are typically better titled individually rather than in the name of a trust. This allows for easier transfer or sale of the assets.

5. Certain Bank Accounts: Standard checking and savings accounts may not need to be placed in a trust if they have designated beneficiaries. Instead, consider using payable-on-death (POD) or transfer-on-death (TOD) designations to ensure smooth transfer to beneficiaries outside of the trust.

6. Life Insurance Policies: Life insurance policies typically have their own beneficiary designations, allowing for the direct transfer of proceeds to beneficiaries. Naming the beneficiaries directly is usually more straightforward than placing the policy within a trust.

7. Property with Mortgage: If you place property with an existing mortgage into a trust, it may trigger the due-on-sale clause, requiring the loan to be paid in full. Consult with your lender and a legal professional before considering such transfers.

8. Small, Low-Value Assets: Assets of low value or those that don't significantly contribute to your overall estate plan, such as minor bank accounts or household items, may not require inclusion in a trust. These assets can be distributed according to a will or handled through simplified probate procedures.

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